1. Headline & intro
India just turned up the volume on state-backed venture capital at the exact moment private money is getting cautious. A new $1.1 billion government fund-of-funds, aimed squarely at deep tech and advanced manufacturing, is more than domestic industrial policy – it’s a signal that India wants to be a capital power in the next wave of foundational technologies, from AI to chips to robotics.
In this piece I’ll look at what’s actually been approved, who stands to win or lose, how this fits into the global “strategic capital” race, and what it means for European founders and investors who already rely heavily on public money for deep tech.
2. The news in brief
According to TechCrunch, India’s cabinet has approved a new ₹100 billion (around $1.1 billion) state-backed venture capital programme. Instead of investing directly in startups, the government will act as a fund of funds, committing capital to private VC funds that then deploy into companies.
The scheme, first floated in the January 2025 budget, complements an earlier 2016 programme of the same size. That earlier vehicle committed money to 145 private funds, which in turn invested roughly ₹255 billion (about $2.8 billion) into more than 1,370 startups.
This new iteration is more targeted: it prioritises deep-tech and manufacturing startups that need larger cheques and longer horizons, aims to support early-stage founders outside India’s major hubs, and explicitly seeks to strengthen smaller domestic VC funds.
Alongside the fund, the government has extended the period during which deep-tech startups qualify for special incentives to 20 years, and raised the revenue ceiling for those benefits to ₹3 billion (around $33 million). The move comes as total startup funding in India fell about 17% in 2025 and deal volume dropped nearly 39%, per data cited by TechCrunch.
3. Why this matters
This is not just another government scheme with a nice logo and a slow burn rate. It hits several pressure points at once.
First, it recognises that deep tech runs on a different clock. AI infrastructure, semiconductors, space, robotics, advanced materials – these rarely fit into a 7–10 year venture cycle. By explicitly privileging deep tech and extending startup eligibility to 20 years, India is trying to make the asset class investable for local capital, not just for foreign sovereign funds or strategic investors.
Second, it shores up the market exactly when private capital is hesitating. With India’s startup funding down double digits and deal counts down almost 40%, many early-stage and first-time funds are struggling to raise from traditional LPs. A large, state-backed fund-of-funds can act as an anchor LP, giving smaller managers the confidence – and signalling power – to bring in more private money. That’s essentially what Israel’s Yozma programme did in the 1990s, with huge long‑term payoff.
Third, it tilts the playing field toward local managers. The stated goal of strengthening India’s domestic VC industry, especially smaller funds, is not neutral. Global funds may still co-invest in hot rounds, but the real leverage – picking winners at seed and Series A – could increasingly sit with Indian GPs whose funds are underpinned by government capital.
Who loses? Potentially:
- Late-stage capital that thrived on growth-at-all-costs consumer plays could see fewer subsidised bets.
- Founders building yet another delivery or fintech app may find that the cheapest capital in town now has different priorities.
- And if governance is weak, taxpayers lose – through politicised allocations, mispriced risk, or “tourist funds” that exist primarily to harvest subsidies.
The core question is whether this crowds in private investors around real technological moats, or crowds them out by distorting incentives.
4. The bigger picture
India’s move drops neatly into a global pattern: governments are increasingly acting like LPs of last resort in strategic technologies.
The US has the CHIPS and Science Act, plus an expanding web of defence- and security-driven innovation programmes. The EU is rolling out IPCEI schemes for chips and cloud, while the European Investment Fund quietly anchors countless deep-tech funds. China has spent years funnelling hundreds of billions of dollars through state “guidance funds.” Gulf sovereigns pour petrodollars into everything from AI models to electric vehicles.
India is adding its own flavour: not a single giant sovereign fund, but a series of targeted vehicles that try to catalyse a domestic VC ecosystem rather than replace it.
Historically, these experiments have had mixed results. When state money is:
- Clear in objective (e.g. build a semiconductor supply chain),
- Disciplined in governance (independent investment committees, market-rate expectations), and
- Limited in scope (crowding in, not dominating),
it can create whole industries. Yozma in Israel and, in a different way, Bpifrance in France show how public capital can de-risk deep tech without permanently zombifying markets.
When those conditions are missing, you get the opposite: moral hazard, valuation bubbles in fashionable subsectors, and a generation of founders optimising for grants instead of customers.
India’s design choice – fund-of-funds via private GPs – is encouraging, but not a guarantee. The real test will be selection: who gets to manage these funds, on what terms, and with how much political distance.
For global tech, the signal is obvious: deep tech is no longer just a venture theme; it’s industrial strategy. Countries are racing not only to build AI models and fabs, but to control the cap table of the companies that matter.
5. The European / regional angle
For Europe, this is both a wake-up call and an opportunity.
On paper, Europe already does something similar. The European Investment Fund, the European Innovation Council, national banks like KfW, Bpifrance or CDP – these are all, in effect, state LPs in deep-tech funds. The new European Tech Champions Initiative is meant to fix the scale-up gap.
But there are key differences:
- Speed and focus. India is concentrating a sizeable sum on deep tech and manufacturing with relatively simple messaging. European programmes often spread money across many themes, sectors and countries, with heavy administrative overhead.
- Market narrative. India is framing this as an aggressive growth story: 200,000+ startups from fewer than 500 in 2016, and a deliberate shift into higher-tech territory. Europe tends to talk in terms of risk management, regulation and guardrails.
For European founders, India’s move means:
- A potentially deeper pool of Indian co-investors in AI, hardware, and industrial tech – useful for those targeting the Indian market.
- Tougher competition for talent and capital in exactly the sectors Europe claims as its own strengths (industrial automation, climate tech, B2B AI).
For European policymakers, it underlines a harsh reality: others are willing to use the state balance sheet more assertively to build national champions in deep tech. The EU’s upcoming AI, data and competition frameworks (DSA, DMA, the AI Act) will shape behaviour, but they won’t replace capital.
The smart response is not to copy India one‑to‑one, but to streamline Europe’s own public VC architecture and actively build EU–India deep-tech corridors: co‑funded programmes, shared testbeds, and joint research that take advantage of India’s scale and Europe’s engineering depth.
6. Looking ahead
Several things are worth watching over the next 12–36 months.
Who gets the money? The list of VC funds selected as partners will tell us everything. If the bulk goes to politically connected conglomerates, the programme will underperform. If it backs specialist deep-tech managers, newer funds, and regionally distributed GPs, it could reshape India’s cap table.
How fast is deployment? Many government vehicles die slowly through bureaucracy. If India wants to influence the AI and advanced manufacturing race, it cannot spend five years just setting up committees. A realistic but ambitious pace would be to have most commitments allocated within 2–3 years.
Will there be policy follow-through? Capital alone doesn’t fix deep tech. Startups also need public procurement, open data, clear export rules, and patient regulation. Watch whether India aligns this fund with defence, health, energy and manufacturing procurement – that’s where real leverage lies.
What happens in the next cycle? If global venture rebounds and late-stage capital floods back into India, will the state step back, or will public money remain permanently embedded in the market? A healthy outcome would be: state capital is catalytic at the risky end (pre‑seed to Series B), while the private market carries scaling risk.
For European readers – especially LPs and fund managers – there is also a strategic question: will you treat India as a competitor for limited deep-tech dealflow, or as a partner market where joint funds and co‑investment vehicles make sense?
My bet: we’ll see more cross-border vehicles where European GPs bring industrial and regulatory expertise, and Indian GPs bring market access and state-anchored capital.
7. The bottom line
India’s new $1.1 billion state-backed VC fund is more than domestic startup support; it’s a deliberate play to own a bigger share of the world’s deep-tech future. Done well, it could crowd in private capital, professionalise smaller funds and push India up the value chain. Done badly, it risks creating a politicised, grant-driven ecosystem.
For Europe and other regions that already rely heavily on public money in deep tech, the question is unavoidable: are you prepared to match this level of strategic intent – not just in euros committed, but in speed, focus and execution?
